Federal proposal to ban
state actions to regulate AI defeated
The states hold limited and contingent authority over insurance. The arrangement could end tomorrow.
By Kevin P. Hennosy
If artificial intelligence (AI) triggers feelings of menace and unease, then take heed. Humankind has a new defender against a dystopian threat from learned machines taking control of a captive humanity.
The defender’s name is the National Association of Insurance Commissioners (NAIC). We should fear not! We have that going for us!
The NAIC earned its proverbial hero’s cape as part of a broad coalition formed to oppose one provision of legislation formerly known as “The Big Beautiful Bill.” As passed by the U.S. House of Representatives in late May of this year, the bill included a provision that placed a 10-year moratorium on state actions to regulate AI. The moratorium banned new state laws and regulations, as well as state enforcement of existing statutes and rules. We will note that the moratorium provision was not limited to the business of insurance.
What could go wrong?
Not alone
So, the NAIC was not alone in this fight. Other advocates for insurance companies, agents, and brokers stood united against the moratorium. The National Conference of Insurance Legislators (NCOIL) also opposed the moratorium proposal. In addition, most governors, legislators, and attorneys general voiced opposition to a moratorium. Also, consumer groups, unions, civil rights groups, and faith-based organizations added their political opposition to the proposal.
An NAIC letter argues that an “overly broad” definition of AI included in the moratorium provision “would have unintended consequences” for state insurance regulation. The NAIC opined: “This sweeping approach could prevent state regulators from reviewing or responding to new risks in these areas, even when no actual ‘artificial intelligence’ is involved.”
To back up its opinion, the NAIC offered the following caveat:
The language in question would potentially apply not only to advanced machine learning systems, but also to a wide range of processes using existing analytical tools and software that insurers rely on every day, including calculations, simulations, and stochastic forecasts performed in millions if not hundreds of millions of Excel spreadsheets, databases, coded scripts, and a multitude of InsurTech provided analytical systems for rate setting, underwriting, and claims processing.
The NAIC also alerted the Congressional legislative leadership that the “moratorium could disrupt the well-established processes that state regulators use to review models and ensure fairness and transparency in insurance markets and ensure that premiums charged to the consumer are not inadequate or excessive.”
The NAIC letter continues with a statement of industry and regulatory norms: “Insurers already use advanced analytics in rate setting, underwriting, and claims review, and state regulators have developed rigorous review procedures to safeguard consumers from unfair or discriminatory practices.” Lucky for the NAIC, one may assume that no one in Congressional leadership is likely to have heard of “open competition, use and file, or file and use approaches to rate setting.”
In what amounts to a regulatory frenzy for the go-along to get-along association, the NAIC cautions Congress that “[r]estricting state oversight at this critical juncture would undermine these protections just as the use of predictive analytics is increasingly becoming more widespread and limit state regulators’ ability to adapt the regulatory framework as AI and insurer use of AI develops.”
“Cruzed?”
From the time that the U.S. House passed “The Big Beautiful Bill,” the viability of the moratorium proposal was in doubt. The largest tech companies “swung for the fence” by having the provision placed in the House bill. Such a broad-based proposal was bound to attract opposition in many quarters of the policy realm, which it did.
In addition, chances of success for the proposal suffered because Senator Ted Cruz (R-Texas) wielded the gavel of the committee that holds jurisdiction over AI. Senator Cruz has never learned the skills necessary to become the next great legislative baron from Texas.
Senator Cruz is not known as a cooperative lawmaker. Cruz is known for his abrasiveness and self-centeredness. Even former Speaker of the House and fellow Republican John Boehner noted his dislike of Senator Cruz: “I have Democrat friends and Republican friends. I get along with almost everyone, but I have never worked with a more miserable [expletive deleted] in my life.” Boehner is not alone in this assessment. If readers desire to sate their curiosity for similar quotes, that is why we have the internet.
When the Senate began to consider the bill in earnest, it was clear that many Senators did not appreciate the House attaching the provision to a “must pass” bill. Senator Cruz seemed to revel in his colleague’s disgust for his handy work.
Of course, the senators knew that Big Beautiful Bills tend to become legislative Christmas trees festooned with all kinds of ornaments, lights, tinsel, and gifts. Such provisions serve as Super PAC stuffers—fetching financial contributions from special interests to these “independent expenditures” that are “aligned” with a candidate. Still, the Senate as whole received the moratorium proposal with a distinct level of repulsion.
By the time the Senate started debating The Big Beautiful Bill, Legislative Whips could not arrive at a tally where the moratorium provision achieved the votes needed to pass the chamber.
As the Senate started test votes, Senator Cruz had cut a deal with Senator Marsha Blackburn (R-Tenn.), which shortened the moratorium to five years, and provided regulatory carve-outs preserving states’ abilities to regulate AI related to Country Music Artists and children. (Yes, you read that right.) The Cruz-Blackburn compromise breathed life into the moratorium provision; however, by July 1 the proposed ban on the states “gave up the ghost.”
Senate Majority Leader John Thune (R-South Dakota) gave word to his caucus that the provision no longer had his protection. Within hours, the Senate voted 99-1 to remove the moratorium provision from its version of the reconciliation bill.
Creation myths
This column began with a comment about fear and so it shall end.
The second paragraph of the letter foretells the NAIC’s reliance on legend and lore rather than history and law, such as, “For more than a century and a half, state insurance regulators have worked collaboratively to ensure a stable, fair, and consumer-focused insurance marketplace, adapting to new risks and technologies as they emerge.”
Do unicorns, rainbows, and ponies cuddle the land? Did some Fisher King or Golden Bough establish the perfection described by the NAIC?
The NAIC could have used the history of insurance regulation in its arguments against the moratorium proposal. Take the example of the McCarran-Ferguson Act of 1945, which before its passage was known as “The Moratorium Bill.” That bill was supposed to sunset the moratorium after 1948, but today even otherwise informed people believe that the McCarran Moratorium remains in effect 80 years later.
But then, someone around the NAIC would have to know the History of U.S. Insurance Regulation, which does not seem to be the case.
We may assume that the drafters of the NAIC letter refer to the 154-year history of the NAIC. We may note that between the end of the Civil War and 1944, a private regulatory framework consisting of fire insurance cartels and interlocking life insurance boards held preeminent power to regulate the business of insurance.
This private regulatory framework summoned state officials to convene a convention of insurance officials to “harmonize” state activities for the purpose of reducing the cost of compliance for companies. That convention ossified into the NAIC, which quickly created a “convention annual statement blank” that reduced accounting and reporting costs for multi-state insurers.
Meanwhile, fire insurance cartels not only regulated the rates and products of member companies and agents. The cartels also inspected cities and compelled them to adopt fire prevention building codes and firefighting capabilities.
No state insurance regulator ever dreamed of having that kind of power.
In the years following World War II, after the U.S. Supreme Court ruled that the business of insurance is interstate commerce, and recognized the constitutional jurisdiction over insurance to Congress, the ruling in United States v. South-Eastern Underwriters Association put an end to the private regulatory framework described above.
If Congress and the Roosevelt administration believed that competitive markets could “regulate” insurance, those two branches of government would not have responded to the Supreme Court’s ruling. Congress and the administration would have just let federal antitrust law and Federal Trade Commission oversight fall upon the business of insurance.
From that point on, the states’ role in insurance regulation existed only to the extent the Congress said so. The states hold limited and contingent authority over insurance. The arrangement could end tomorrow.
Congress could call back its loaned authority from the states at a time of its choosing. For that matter, a Federal Court could rule that one or more state jurisdictions have deregulated insurance, which would return jurisdiction of insurance to the realm of federal law without requiring an act of Congress.
For those who genuinely believe that the state-based regulatory framework for insurance remains desirable, the fear should be that the NAIC Washington staff may believe the bunkum that they put in letters and testimony.
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.
